A: The first screen that we do is by yield and this eliminates many stocks because every stock in our portfolio either has a regular dividend or we believe the company will be initiating a special dividend in the near future. Then, within that universe, we are very traditional. We have meetings where we all share ideas and we try to do this at least once a week. We take a top-down industry and regional view of the world to see where the opportunities are.

We combine that with a bottom-up fundamental stock-picking analysis and decide what we want to buy, sell and what we want to hold on to. The most important factors in our bottom-up analysis are earnings growth and cash flow outlook. Then we combine the earnings and the cash flow outlook with valuation because you can love a sector or a stock but it can be overvalued. When we find companies where our top down view of the world or the industry matches with the bottom-up valuation work, we put them in the portfolio.

Q: Why is the company's ability to generate cash flow is important to you?

A: Dividends are paid from cash which may or may not come from earnings. Some companies can have no cash and no retained earnings but they are actually returning capital when they pay a dividend and that wouldn't count as a qualified dividend. This kind of dividend is nothing but a return of capital and all it does is that it lowers your cost basis. So companies need cash and taxable retained earnings to pay dividends. Oftentimes you can have a company with high depreciation so the earnings may be lower but their cash flow is higher. We always look at the cash flow generating ability of a company on top of their earnings growth outlook because sometimes the free cash flow will look a lot better than the earnings growth. And, dividends are paid from cash.

Q: How do you go about portfolio construction?

A: We have a group of analysts and portfolio managers that screen their individual sectors and come up with the names that fill our outlet for earnings growth, dividend and valuation. Amongst all of our dividend and global funds we probably have about 200 stocks that we're investing and following globally. The core portfolio is of anywhere between 70 to 90 positions and the rest of them we rotate over time in our dividend capture strategy.

We have rarely ever had a holding more than 3% of the portfolio. We are diversified in our portfolio so our top ten holdings consist of approximately 20% of the portfolio. We usually keep our holding allocation below 2.5% at the most and the ones that are above 2.5% are generally the ones with a high dividend yield.

We do a number of special dividends where companies pay out either large one-time dividends or we take advantage of semiannual dividends overseas.

Q: If you find a good company with good earnings growth but with virtually no dividend, would you still consider investing in it?

A: It depends. Our objective is income. If there's a great company that we love, we'll go low on the dividend screen.

For example, Monsanto, the corn producer, has about a 0.58% dividend yield but we won't go much lower than that unless we felt that there was a fantastic growth opportunity. We don't like to buy a stock just for a dividend and we don't buy stocks that don't have dividends so a Monsanto has a dividend but we would have it in there more for capital appreciation story.

You might have a company like Regal Entertainment, which has about a 5.8% dividend yield. It's the largest theater operator in the US. We have capital appreciation but again the stock yield is almost 6% so in that case Regal is in the portfolio first for the dividend income and second for the capital appreciation. In this way we are trying to balance the portfolio.

Q: What happens if you are in a situation where the expected growth in capital appreciation may turn out to be different than you anticipate and then it could also wipe out the gains that you have through the income?

A: To be a good investor, you have to be able to sell things. We don't fall in love with names and if the story changes, we just sell and move on to find better opportunities. We don't want to have significantly more than 100 - 120 stocks in the portfolio because then you start to dilute your performance.

In other words, the stock has to be serving a purpose in our portfolio. If we have it in there for growth and income, and it's not working, we take it out.

For example, one of the sectors that we like is bulk shipping. There are a lot of companies with high dividends and good growth because they are acquiring other shippers and they are benefiting from iron ore going from Brazil to China. China needs iron ore to build steel and the whole world is building infrastructure. You get most of your iron ore from Brazil and Australia and then a little bit from the U.S. and you need ships to take that iron ore. We like the sector and we own a few of the names in that sector. A lot of their growth was based on acquisition of either other companies or new construction but then, all of a sudden, you have this credit crisis. The companies needed the financing to grow through acquisition and new builds and we had to step back as we decided we didn't want to be in some of the names that have bigger new building programs.

Q: What kinds of risks do you monitor and what do you do to mitigate them?

A: The biggest risk is that right now the markets are so dominated by hedge funds and black boxes and program trading that what we have just come through is a period where in volatile times the fundamentals are not being paid attention to and many great companies are being hit along side with the weaker, riskier companies. Last summer, when the first wave of problems started related to credit market, we sat back and we certainly identified the direct financial risk that we thought we had. We've never owned any company that was directly associated with sub-prime. We went down the credit chain and looked to sell or reduce our exposure to the companies in our portfolio that had a lot of acquisition or leverage in their strategy.

We are stock pickers and we try to assess the risk on a stock-by-stock basis. It's very challenging when the market sell-offs are broad and persistent. The risk for our investors is that they do need to understand that 30% to 40% of the portfolio is in international stocks. We feel that is the best opportunity for our investors for dividends and capital appreciation. Dividends in overseas markets are higher than in the U.S., which is actually one of the lowest yielding markets in the world.

In Europe, Australia and New Zealand dividend yields are significantly higher than what we get in the U.S. but these markets can be more volatile than the U.S. So I would just tell our investors again on a stock by stock basis we are trying to assess the risk of each country, of each holding, of each earnings and cash flow outlook.